As highlighted in the last few “Market’s Bill of Health” reports, the S&P 500 has been showing weakening breadth and momentum which typically occurs before short-term tops. In prior reports it was shown that weakness in cyclicals was the culprit as the defensive sectors led by health care continued to power higher. Currently, however, recent movements in the cyclical sectors suggests that their underperformance to the broad market may be ending, with a weakening USD providing the catalyst.

S&P 500 Trend Strength* Note: Numbers reflect the percentage of members with rising moving averages: 200d MA is used for long term outlook, 50d MA is used for intermediate outlook, and 20d MA is used for short term outlook.

S&P 500 Member Trend Strength

Breaking out the 500 stocks within the S&P 500 into their respective sectors and viewing their long (200d SMA) and intermediate trends (50d SMA) shows the defensive sectors are surfacing as short-term leaders as they possess the strongest short-term breadth (% of members above their 20 day moving average). The most important section of the table below is the 200d SMA column which sheds light on the market’s long-term health. As seen in the far right columns, you have 86% of the S&P 500 members with rising 200d SMAs and 88.8% of its members above their 200d SMA with all ten sectors in bullish territory.

While defensive sectors like consumer staples and the utility sector have the strongest short-term breadth (% members > 20d SMA), the cyclical sectors like financials and industrials are still showing the strongest long term breadth with 98% and 93% of their members possessing rising 200d SMA respectively.

Source: Bloomberg

Market Momentum

The Moving Average Convergence/Divergence (MACD) technical indicator is used to gauge the S&P 500’s momentum on a short, intermediate, and long term basis. The daily momentum for the market may be stabilizing as the percent of stocks within the S&P 500 with daily MACD BUY signals has risen from 31% last week to 49% currently.

The intermediate momentum of the market remained steady at a strong 71% reading this week though it has declined from its peak in February.

While we’ve seen weakening in the weekly momentum of the market, there has been no dent in the markets longer-term outlook as there was slight improvement with the percent of S&P 500 members with monthly MACD BUY signals rising to 82% this week from 77% two weeks ago.

As seen in the lower table, the S&P 500 itself gave a daily MACD BUY signal today after being on a sell signal since March 20th. Its weekly and monthly signals remain in BUY positions.

Source: Bloomberg

52-Week Highs and Lows Data

Over the last five trading days we’ve seen nearly a fourth of the S&P 500 members hit 52-week highs, which is a solid reading. However, three of the top four sectors leading the 52-week ranks are defensive sectors which isn’t surprising given the loss in daily momentum by the cyclicals with fewer daily MACD BUY signals as highlighted above. Part of what is weighing on cyclicals is strength in the USD. Strength in the USD weighs on commodity prices, which hurts the energy and materials sector, and also weighs on exports, which hurts the industrial sector. Likewise, a strong dollar and weak Euro weigh on the technology sector, which has considerable exposure to Europe. While the cyclical sectors have been hurt by the recent strength in the dollar, that may be changing as highlighted in the next section.

Source: Bloomberg

Mulit-Indicator Summary

As seen in the multi-indicator chart below, we see negative divergences in the percent of members above the 20 day (red line) and 50 day (blue line) moving averages in the second panel and negative divergence in the percent of members with an RSI reading greater than 70 (3rd panel) and the percent of members hitting new 3-month highs (4th panel) and with MACD lines above zero (fourth panel). This negative divergence setup is what we saw prior to the September-November correction in 2012. However, of note is that the % of members above their 20d SMA has bottomed and is now turning up as it did at the February low. Additionally, the % of members with new MACD daily BUY signals is rising again indicating bullish momentum is picking up with the majority of the recent MACD BUY signals coming from the cyclical sectors.

Source: Bloomberg

While the cyclical sectors have been weighing on the breadth and momentum of the S&P 500 over the last month, this may be changing if the USD weakens ahead. Typically the cyclical sectors tend to perform better with a weak USD, which boosts commodity prices (helps materials and energy) and exports (helps industrials), as well as foreign profits denominated in other currencies (boosts technology earnings which have large exposure to Euro).

As seen below, reviewing the commitment of traders report (COT) shows that speculative positions relative to total open interest (red line below) has hit an extreme recently which typically occurs near USD tops. If the USD does weaken ahead we should expect the cyclical sectors to come to life again, which should help propel the S&P 500 higher as energy, materials, industrials, and the technology sector represent 42% of the entire S&P 500 market cap and generally benefit from a weak USD.

Source: Bloomberg

Summary

The market continues to march higher in 2013 as the market’s long-term breadth and momentum remain strong across nearly every sector. We were seeing weakness in short-term momentum and breadth which is largely due to weakness seen in cyclical sectors. However, these same sectors are showing the greatest improvement in short-term breadth and momentum and helped drive a daily MACD BUY signal to be given for the S&P 500 and may help to drive the market even higher. One catalyst that is likely responsible for the improvement in the cyclical sectors is recent weakness in the USD. Given speculative sentiment towards the USD based on the COT report remains near elevated levels, we may continue to see weakness in the USD ahead and thus further strength in the cyclical sectors.